Credit-Card Pirates Ripe for Regulation

Claire McCaskill recently got a chance to do something that millions of us have wanted to do. She got a chance to tell the executives of the major credit-card companies what she thought of them.

Ms. McCaskill is the junior Senator from Missouri, one of the good things that happened in the last election. As a member of the Permanent Subcommittee on Investigations and seated up on the dais, she looked down on those corporate hair bags from J.P. Morgan Chase and Citigroup and told them how her mother’s credit-card company had taken advantage of an elderly, unwell widow. Heretofore, like the rest of us, Ms. McCaskill has had to battle to get a human voice from the credit-card company on the phone.

If you are one of the about 40 percent of cardholders who pay off the whole bill every month, you know your credit-card company is dirty and swinish but, since they do not really have you in their grips, you don’t know how bad these guys are. You do know, of course, how they play games with you to trick you into getting your check after the deadline, which only they know, so they can hit you with a late fee. Or you may have been hit for the interest on a $1,000 monthly bill because you inadvertently wrote a check that was 20 cents short. And that’s a real story.

There were a lot of real stories at the hearing. Alys Cohen, a lawyer at the National Consumer Law Center, told one of them about “a young Navy sailor who opened a credit card account with First Premier Bank on November 21, 2006. The credit card had a $250.00 credit limit and a 9.9% APR for purchases. The same day that the sailor opened the account, he was assessed two fees—a Program Fee of $95 and an Account Set-Up Fee of $29. The next day (November 22), he was assessed a Participation Fee of $6. Three days later (November 24), he was assessed an Annual Fee of $48. When this young sailor received his first month’s bill, which had a closing date of November 24, 2006, he had already accrued a balance of $178, without making a single purchase.

“The next week, the young sailor used the credit card for four transactions totaling $84.85. On December 22, 2006, he was assessed a participation fee of $6. With all these fees, the young sailor was already over his credit limit, despite making less than $85 in purchases on a card with a $250 limit. He was assessed an over-limit fee of $25 and a late fee of $25, plus a finance charge of $1.96, on December 26.”

The hearing featured the sad tale of Wesley Wannemacher, married with a family back in Ohio, who contracted $3,200 debt on a J.P. Morgan Chase card on which he paid back $6,300, after which he still owed the S.O.B.’s $4,400. The guys in turtleneck sweaters with baseball bats who collect for the mob, or did in the old days, could not have done better than these modern Morgan Chase racketeers.

Once upon a time, when many bankers had the reputation of being a little skin-flinty but honest, they went about extending credit only to people that they had reason to believe could and would make good on their borrowings. The modern credit-card crook/banking executive seeks out bad risks, searches for people who will not be able to pay and shoves a card in their hands. They shark after students, old people, the uneducated, the sick, active-duty military-service personnel, anybody and everybody who might be too young, too inexperienced, too stressed or too desperate to know what signing a credit-card application means. It is a 180-degree reversal of what was once sound, and also ethical, banking practice.

As Alys Cohen says, “It’s not plasma-screen televisions or luxury handbags—it’s the medical bills, the groceries, the car repairs and the gas bill that pulls families into the quagmire of high credit-card balances, higher interest rates and fees.”

Elizabeth Warren, the Leo Gottlieb Professor at Harvard Law School, whose specialty is in these realms, says that “these companies know they can make higher profits if the customers finance their purchases over time, paying their credit card bills a little at a time, some of them for a lifetime. And the companies knew that they could make truly extraordinary profits if the customers stumbled and the company loaded up on default rates of interest and penalty fees. In 2005, interest and penalty-fee revenues alone added up to a staggering $79 billion.

“The sweet spot is the customer who stumbles and pays late fees and high rates of interest. Nearly eight out of every 10 dollars of revenue comes from the customers who cannot pay off their bills in full every month.”

When you sign up for a credit card, there is no way to know what you may be letting yourself in for. The tricks and traps, as Ms. Warren calls them, are hidden in the credit-card contract that the bankers have expanded from one page in the early 1980’s to 30 pages in the early 2000’s. What’s more, Ms. Warren noted that “the inserts sent along with monthly bills to amend the card agreements are filled with language even a lawyer would have difficulty parsing. In such an environment, the average consumer doesn’t have a prayer.”

For years, Michigan Senator Carl Levin, the committee chairman, has been trying to pass a law, but with Republicans in charge you can guess how far he got. But now this man, who is at least a minor national treasure, is in the chair peering over his spectacles and in his courtly way driving hard. The challenge he must overcome is to write a law that the clip artists and sneak thieves who run the credit-card industry cannot slither their way around.

Whatever law is passed, it will probably be left to the Federal Trade Commission or the Federal Reserve Board to implement, and these are organs of government where bank lawyers and lobbyists have their sway. In no time, the intent of the law will be turned on its head.

So how about a different approach? Instead, let the law say that credit-card debit obtained by these various abuses “and by all other as yet uninvented tricks and dishonest devices” are legally uncollectible. If the bankers are going to use the credit-card business to cheat people and steal from the innocently unwary, the law courts should not be used to assist them in their thefts.

Do that, and it won’t be long before the banks stop offering loans to people who cannot afford to pay them back.